Correlation among asset classes on the rise: CRISIL GR&A

A study conducted by CRISIL Global Research & Analytics (GR&A), the world's largest and topranked provider of high-end research and analytics services, shows there has been an accentuated correlation among traditional asset classes over the past 5 years compared to any period before the year 2008. This increase in correlation has also been accompanied by lower returns, thus giving cause for concern to global fund managers. Around 88 percent of respondents to the survey indicated that correlation is now among the top 5 investment risk factors and 65 percent believed that correlation is causing a material negative impact on the availability of alpha-generating opportunities.

Said V Srinivasan, Senior Director, CRISIL GR&A, "Our survey shows a structural uptrend in correlation with low possibility of returning to historical levels, supported by globalisation and financialisation of assets. This will have two implications for financial research. First, research will get further streamlined; second, we will see more investments in high-end research to capture alpha." According to CRISIL GR&A's analysis of 33 assets and 528 pairs of correlation over the period 1998-2012, the proportion of asset classes with correlation level in excess of 0.3 has risen from 31 percent to 58 percent between 1998-02 and 2008-12. This increase in correlation is particularly pronounced during the last 5 years. There has been a material increase in correlation across all dimensions, a corresponding drop in opportunities for securing benchmark-beating returns and a reduction in the level of outperformance. At a more granular level, this increase is more pronounced within equities, leading to a reduction in the extent of outperformance. The equity correlation across various pairs has increased from 0.6 during 1998-2002 to a relatively steep 0.86 during 2008-2012. This has prompted investors to pursue non-correlated assets. However, even those assets which have been historically low on correlation are now seeing a rise in correlation with their returns converging. For instance, returns from multi-asset funds, which tend to invest in alternative asset classes, have converged with the MSCI World Index, an equity index. Said Suresh Krishnamurthy, Director, CRISIL GR&A, "We see this becoming a trend. As newer, non-correlated assets emerge, we see them eventually getting correlated and offering lower alpha potential over time. This calls for a healthy pipeline of new-age alternative assets to emerge. Even as correlation has emerged as a key risk factor, CRISIL GR&A believes it will soon develop into an investable asset class of its own, similar to the way in which volatility has transformed from a risk factor to an asset class. The signs are already visible, as seen in the CRISIL GR&A survey which was conducted with global fund managers spread across Americas (60 percent), Europe (33 percent), and Asia (7 percent). Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose. © CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"

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